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EMEA Morning Briefing : Inflation Nerves to Hold Back Shares

11/10/2021 | 12:39am EST


Watch For:

Germany CPI; Italy Industrial Production; OECD Composite Leading Indicators; updates from Alstom, Naturgy Energy, Siemens Energy, Allianz, Infineon, adidas, Continental, E.ON, Credit Agricole, ENGIE, Holcim, Sopra Steria, Tod's, Erste Group, Aveva, Marks & Spencer, Ahold Delhaize, ABN AMRO, Babcock, ITV, Evraz

Opening Call:

Worries over inflation will likely drag on European shares, as investors look ahead nervously to the latest U.S. CPI reading. Asian stocks suffered broad losses on data that showed China's factory-gate prices in October grew at the fastest pace in 25 years. Elsewhere, the dollar, Treasury yields and oil rose, while gold lost ground.


Major European stock-index futures fell Wednesday, tracking losses on global markets, as worries over inflation heightened ahead of the latest U.S. CPI reading.

In Asia, stocks were lower across the board, with Chinese benchmarks leading the decline after data showed China's factory inflation grew at a record pace in October due to soaring energy prices. The data has added to anxieties that global inflation will persist while constraining Beijing's ability to stimulate the economy.

Meanwhile, China's consumer price index rose at a faster pace in October in part due to logistical bottlenecks that pushed up food and fuel prices.

Zhiwei Zhang, an economist at Pinpoint Asset Management said firms have managed to use their inventories of inputs as a buffer to avoid passing higher costs to their customers but their inventories have been depleted.

"The risk of stagflation continues to rise," said Zhang, adding that this would limit the central bank's monetary easing next year.


The dollar was slightly firmer in Asia with U.S. Dollar Index nudging above 94.00.

Westpac said the underlying picture still seems USD-supportive, and a likely strong U.S. October CPI report should keep intact the trend in the dollar's favor.

USD/JPY remained below 113.00 and Capital Economics said it expects the yen to weaken a bit more against the dollar "as we think that government bond yields in the U.S. will resume their rise before long."

The debate about when the Federal Reserve will deliver its first post-pandemic interest rate rise is likely to drive the dollar's direction well into 2022, said Rabobank.

The discussion over the timing of the first rate rise remains "very much unresolved," said Rabobank forex strategist Jane Foley.

"The outlook regarding 'maximum employment' in the U.S. in addition to various measures of U.S. inflation will continue to feed speculation about the outlook for the Fed funds rate." The composition of the Fed's board could also influence the timing of a rate rise, Foley said.

Rabobank has retained its three-month forecasts for EUR/USD and USD/JPY at 1.15 and 1.12 respectively.


Treasurys were lower in Asia after they rallied across the board on Tuesday, with the 10- and 30-year yields slipping to the lowest level in months, as traders brushed aside data showing U.S. wholesale inflation surged in October.

Traders remained focus on recent dovish pivots of major central banks like the Bank of England and Fed, and said hedge funds continued to unwind wrong-way positions on yields with no let-up in sight.

Tradeweb said real yields are at all-time lows, extending a trend that began after the latest FOMC meeting. According to Tradeweb data, the 30-year TIPS yield is at -0.572%, down from -0.313% on November 3, while the 10-year TIPS fell to -1.195% from -0.964% in the same period.

"Yields on 10-year TIPS have closed consistently in negative territory since the middle of March 2020," said Tradeweb, adding, "the 30-year TIPS yield closed consistently negative from the middle of June 2020, turned positive again in the middle of February 2021, and then dipped in and out of positive and negative territory before closing consistently negative again since the middle of May 2021."

Tradeweb believes reductions in TIPS purchases from the Fed will reduce marginal demand and this may lessen downward pressure on yields.

TD Securities has recommended investors sell 10-year German Bunds at a yield level of -0.29%, targeting -0.15% with a stop-loss on the trade at -0.36%.

Senior European rates strategist Pooja Kumra said that front-end rates markets are now pricing in a 10 basis point deposit rate hike by the European Central Bank by the end of 2022, compared with a 20 basis point pricing a week ago.

"The ongoing rally has been led by the move in real yields as markets expect central banks to be accommodative for longer." However, TD Securities expects the market to turn cautious closer to the ECB's December meeting.


Oil futures edged up on expectations of higher demand from air travel, as U.S. international border curbs eased, said Rystad Energy.

President Biden's infrastructure bill was also a strong oil-demand signal for the future. Rystad said the market seems to be shrugging off the bearish possibility of a U.S. intervention in the physical oil market with the release of its strategic petroleum reserves [SPR]. Even if this happens, it may only affect U.S.-based grades, it said.

Oil settled Tuesday at its highest level in two weeks, with some analysts pointing out that talk of a potential release of crude from the SPR highlights the shortage of supplies.

An SPR release, however, would be a "short-term measure at best," since any inventory drawn from the reserve would have to eventually be replenished, Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch.

Oil prices may even rise in response to an SPR release, he said, as the move "will be seen as a desperate attempt that highlights the acute shortage of oil," said Raj.


Gold prices eased lower in Asia on weak buying interest by ETF investors, as a rally in bitcoin drew funds instead, said Commerzbank.

Some market participants consider bitcoin to be an alternative to gold, it added, noting that bitcoin prices recently hit a new high.

Gold futures settled higher on Tuesday, stretching their streak of consecutive gains to a fourth session, as inflation concerns and interest-rate expectations remained in focus.

Copper prices were steady, with investors in a wait-and-see mood ahead of the U.S. CPI report, said ANZ.

Tuesday's U.S. PPI report showed how transportation bottlenecks, material shortages and increased labor costs are hurting manufacturers and potentially undermining demand for base metals, added ANZ.

Goldman Sachs said aluminum looks oversold after downstream companies emptied inventories to take advantage of previously high prices amid China's power crunch.

The selling has helped send prices lower, but now risks "distorting demand and supply into a deeper fundamental deficit, leaving the market vulnerable to an even sharper rise in prices once downstream destocking is over."

Goldman said that downstream destocking had masked a tightening of the aluminum market amid China's production curbs, and sticks to its three-, six- and 12-month price targets of $2,800, $3,000 and $3,200 a ton, respectively.


China's Factory-Gate Prices Rose at Record Pace in October

BEIJING-China's factory-gate prices in October grew at the fastest pace in 25 years due to surging coal prices.

The producer-price index rose 13.5% from a year earlier in October, accelerating from September's 10.7% increase, the National Bureau of Statistics said Wednesday. October's result is now the highest rate of increase recorded in the data series since it began in 1996, followed by the September figure.

Biden Administration Outlines New Moves to Alleviate Supply-Chain Logjams at Ports

WASHINGTON-Ports snarled with supply-chain problems, including a major one in Georgia, will be able to redirect money from other federally funded projects to help ease the logjams under a plan outlined by the Biden administration.

The existing grant money could be used more quickly under the new policy, administration officials said Tuesday. They also highlighted $17 billion for ports and waterways that will be available after President Biden signs the roughly $1 trillion infrastructure spending package Congress approved last week.

China Offers $4.6 Billion in Euro Bonds

China began selling euro-denominated government bonds, weeks after it raised $4 billion in dollar debt at cheap rates despite slowing economic growth.

The sale is likely to total about EUR4 billion, the equivalent of $4.6 billion, a term sheet showed on Wednesday-the same size as a similar bond deal last November, in which China capitalized on Europe's superlow interest rates to sell its first negative-yielding debt.

Bullard Says Fed Should Weigh Shrinking Its Balance Sheet Eventually

Federal Reserve Bank of St. Louis President James Bullard said Tuesday that he was open to allowing the central bank's massive holdings of cash and bonds to shrink at some point.

Mr. Bullard, who was speaking in a virtual appearance, was commenting on what he would like to see happen once the U.S. central bank winds down, or tapers, the process of expanding its holdings.

Senate Set to Cut Provisions in House Democrats' $2 Trillion Spending Plan

WASHINGTON-While House Speaker Nancy Pelosi (D., Calif.) is hoping for a vote as early as next week on a roughly $2 trillion social-spending and climate bill, the legislation is likely to be altered to have a chance at passing the Senate.

Democrats hold slim control of both chambers: Mrs. Pelosi can lose just three votes in the House, while Majority Leader Chuck Schumer (D., N.Y.) must keep his entire caucus together in the evenly divided Senate. In addition to demands from the different factions of the party, only certain provisions may qualify under Senate rules, because Democrats are using a budget maneuver to pass the bill with just a simple majority rather than the usual 60-vote threshold for legislation.

(MORE TO FOLLOW) Dow Jones Newswires

11-10-21 0038ET

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